150129 Labour productivity
  • Sluggish productivity. What you’ll notice from the graph above is a great decoupling. The economy has recovered to beyond its size at the turn of 2008: it’s now actually 3.4 per cent larger. Whereas the productivity of the country’s workforce, as measured by output per hour worked, is still around 1.8 per cent lower. This not only sets us apart from other leading economies, whose productivity recovered quicker after the crash, but also from our own past. In every other modern recession, productivity has recovered within about two years.
  • But why? The basic maths of it are straightforward: the growth in the number of workers, and therefore in the number of hours worked, has outpaced the growth of the economy. But this leaves a situation in which, as Lord Flight put it in a recent article for ConservativeHome, “we are requiring 106 per cent of the number of people in employment to produce the same output.” Have people become lazier? Have companies been hoarding employees, with little work to give them, for when the good times return? Are the numbers simply wrong? One suggestion that I’m taken with, and that Peter Franklin has highlighted, is that businesses have recruited people with lower than average productivity. The recovery has found room for young people and the long-term unemployed.
  • It’s not just macroeconomics. Jobs for the young and the long-term unemployed? That doesn’t sound like a bad thing – and it’s not. One could even make a case that, with the economy and employment levels growing, we shouldn’t be too concerned about productivity in the first place. But it’s worth remembering that this isn’t just about lines on a graph. Productivity levels are linked, however invisibly, with other variables such as wages. If workers aren’t so productive, then companies won’t be inclined to pay them more. And if companies have to pay more, such as through a statutory living wage, then they may simply look elsewhere.
  • Will it get better? There are signs that things may be about to turn: labour productivity rose by 0.6 per cent in the third quarter of 2014, which was the largest increase for over three years. But will that growth continue into 2015? The answer is an insipid cliché: only time will tell. The composition of our workforce has changed rather drastically over the past few years, with more young people and former benefit claimants and part-timers and so on. The hope is that those people will remain in the labour market – and thrive in it.
  • Permanently productive. The trick, of course, is to maintain a labour market that not only has a plentiful number of jobs, but also a plentiful number of qualified and motivated workers to occupy them. Which is to say, the Coalition’s welfare and school reforms have always been a crucial part of its economic policy.